In most cases, a bankruptcy claim is an amount that a creditor hopes to recover from bankruptcy funds. The claim is unliquidated if the creditor doesn’t know how much the debtor (bankruptcy filer) will eventually owe. Some factor prohibits the creditor from establishing the final amount.
Before the bankruptcy trustee; the official responsible for overseeing the case can pay a creditor in bankruptcy, the creditor must prove several things:
• the amount of the debt
• the debtor legally owes the debt
• the creditor has a right to payment
• the debtor doesn’t have a good faith dispute about the amount owed, and
• there aren’t any unresolved contingencies.
Many debts, like loans and credit cards, are based on contracts between the parties. The contract explains the duties, liabilities, and terms, such as payment amount and interest rate. A balance usually isn’t difficult to figure out at any given time. It’s a relatively simple calculation of principal amount borrowed, plus fees and interest, minus payments. However, sometimes something must occur before the creditor will know how much is owed.
Example. Suppose you’re involved in an automobile accident and the other driver’s insurance company sues you. The monetary cost to the injured person (damages) can’t be determined because the other party’s medical treatment is ongoing. Those costs won’t get finalized until the treatment ends. You also won’t know the total cost that your attorney will charge for defending you. Both the insurance claim and your attorney’s claim are unliquidated. The amounts will be liquidated (known) after the case settles or goes to trial and the court enters a judgment.
Unliquidated Claims in a Chapter 7 Bankruptcy Case
When the trustee finds money to pay claims, the unsecured creditors will usually only receive a pro rata share (a percentage of the funds available). The trustee can’t calculate the pro rata share if unliquidated claims exist. The trustee must know each creditor’s claim amount. Therefore, a Chapter 7 bankruptcy case can’t end before the claims get liquidated. The same holds true for claims the trustee might have against other parties. Trustees often enter into litigation to recover money owed to the debtor (the bankruptcy filer) by people not involved in the bankruptcy. The trustee’s claims must be liquidated so that the trustee knows how much money will be available to distribute to creditors.
Filing for bankruptcy involves filling out numerous bankruptcy forms. On them, you’ll explain your financial situation so that the court, trustee, and creditors know:
• how much you make and owe
• what property you own
• your monthly budget, and
• whether you’ve transferred any property recently.
Of course, listing debt called a claim in bankruptcy—is a pretty important part of the process. Not only will you disclose the creditor name and amount you owe, but you’ll explain whether an issue needs resolving before paying the claim. You’ll do this by labeling the claim contingent, unliquidated, or disputed.
Most Bankruptcy Claims Are Straightforward
In most cases, you won’t run into a problem when listing your bankruptcy claims. There won’t be any outstanding issues you could raise to get out of paying the debt. You simply owe the money.
When the Claim Amount Isn’t Straightforward
Sometimes the amount you owe to a creditor isn’t easy to figure out. Perhaps the amount you owe could depend on what someone else does or might not be determined yet. Or, you and the creditor might disagree as to how much you owe. If any of these is the case, you’ll indicate it when listing that claim on your bankruptcy papers (the form has checkboxes).
Here’s what each term means.
• Contingent claim. Payment of the claim depends on some event that hasn’t yet occurred and might never occur. For instance, if you cosigned a secured loan (such as a car loan or mortgage), you won’t be responsible for paying it unless the other person on the loan fails to pay (defaults). Your liability as cosigner is contingent upon the default.
• Unliquidated claim. Sometimes you owe money, but you don’t know how much yet. The debt might exist, but the exact amount hasn’t been determined. For instance, say you’ve sued someone for injuries you suffered in an auto accident, but the case isn’t over. Your lawyer has taken the case under a contingency fee agreement—the lawyer will get a third of the recovery if you win, and nothing if you lose. The debt to the lawyer is unliquidated because you don’t know how much you’ll owe the lawyer if anything, until the case settles or gets resolved at trial.
• Disputed claim. A claim is disputed if you and the creditor don’t agree about the amount you owe, or if you owe anything at all. For instance, suppose the IRS says you owe $10,000 and has put an involuntary tax lien on your property. By contrast, you believe you owe only $500. You’ll list the full amount of the lien, not the amount you think you owe and indicate that the claim is in dispute (you can explain how much you think you owe in the notes).
Priority Unsecured Claims
Priority unsecured claims are claims that are not secured by collateral but that have priority over other debts under federal law. These debts have priority typically for public policy reasons that is, the well-being of the public depends upon these debts being paid. Priority unsecured debts in a personal bankruptcy case might include child support, spousal support, and any other domestic support obligations; certain income taxes; and any amount you owe if you caused the death or serious injury of another person because you were driving while intoxicated.
Priority unsecured debts are non-dischargeable, which means that any amounts that do not get paid in your bankruptcy are still outstanding. Bankruptcy does not wipe out your obligation on priority unsecured debts unless they are paid in full through the case.
General Unsecured Claims
General unsecured claims are claims that have no priority and are not backed by a security interest in property. General unsecured debts include credit card debts, student loans, personal loans, some utilities and medical bills. General unsecured claims have the lowest priority of all claims. After the bankruptcy estate pays administrative expenses, priority unsecured claims and secured claims, general unsecured creditors will receive a pro rata distribution of the remaining funds.
General unsecured debts are generally dischargeable, which means any amount that is not paid through the bankruptcy is wiped out and no longer your responsibility. There are exceptions to this rule; student loan debt is only dischargeable if you can demonstrate extreme hardship. Also, if you obtained a debt fraudulently, the creditor can ask the court to deem it nondischargeable. For more information about nondischargeable debts, see Bankruptcy Discharge: Which Debts Are Wiped Out?
Example. Anne files Chapter 13 bankruptcy. She owes the IRS $10,000, which is a priority unsecured claim. She also owes $100,000 in general unsecured claims. Over the course of Anne’s Chapter 13, she will make $55,000 in Chapter 13 plan payments. Of those payments, $8,000 will go toward administrative expenses, such as trustee fees and attorney fees. The IRS will receive $15,000 for the tax debt plus interest. The remaining $32,000 will be distributed pro rata to the general unsecured creditors. $32,000 is 32% of the total $100,000 debt, so each general unsecured creditor will receive 32% of the amount owed, and the rest will be discharged.
Example. Ben files Chapter 7 bankruptcy. He owes back child support in the amount of $12,000. He also owes $25,000 in credit card debt. He owns an RV that he cannot exempt, so the trustee sells the RV for $10,000. The trustee’s expenses, including fees, for the sale of the RV total $1,500. The remaining $8,500 of the proceeds will be paid to the state for the child support arrears; the credit card companies will receive nothing, and the credit card debt will be discharged. Ben will still be responsible for the remaining $3,500 in back child support.
Example. Kyle was sued by the family of a man he killed in a drunk driving accident. The court awarded the family $500,000 in wrongful death damages, and Kyle is responsible for the full amount. He also owes $25,000 in credit card debt. Kyle is unemployed, so he files Chapter 7 bankruptcy. His estate has no assets, so none of Kyle’s creditors will receive payment. The credit card debt will be discharged; however, Kyle will still be responsible for the $500,000 wrongful death judgment.
Secured claims are claims for debts that are secured by an interest in property. A secured creditor can take that property, the collateral, if you default on the debt. The most common secured loans are car loans and mortgage loans, but you may also have secured loans for furniture, jewelry, watercraft, and other types of property. In a bankruptcy case, secured claims must be paid in full if you want to keep the property that secures the loan. If you choose to surrender the property (give it up), the loan is treated as a general unsecured debt.
Example. Dave owes $10,000 on his car; the car is worth $8,000. Dave files Chapter 7 bankruptcy; his estate has no assets. He cannot afford the car, so he chooses to surrender it. The dealership repossesses the vehicle and sells it for $4,000. The remaining $6,000 of the loan is discharged in Dave’s bankruptcy.
Example. Sue files Chapter 13 bankruptcy to save her car. Her Chapter 13 plan proposes to pay the full balance of the loan, which is $8,000, plus interest. Two years into her Chapter 13 case, Sue suffers a pay cut at work and can no longer afford the car. She modifies her Chapter 13 plan to surrender the car. The current balance due is $5,000. The creditor repossesses the car and sells it for $2,000. The creditor must then amend its proof of claim with the bankruptcy court to reflect a general unsecured claim in the amount of $3,000, which will be paid pro rata along with all other general unsecured creditors.
Example. Joanne is underwater on her house; she owes $150,000 to the mortgage company, but her latest tax appraisal gives a value of $100,000. She has fallen behind on her mortgage payments. She files Chapter 7 bankruptcy and decides to surrender the house. She does have an investment account that she cannot fully exempt, and the trustee seizes $8,000 from the account. The mortgage company forecloses and sells the home for $60,000, leaving a deficiency of $90,000. The mortgage was Joanne’s only debt. The trustee’s fees for the seizure of the investment account total around $1,500, leaving $6,500 for creditors. The mortgage company receives the $6,500 and the remaining $83,500 deficiency balance is discharged.
You Must List All Claims in Bankruptcy
It’s common for someone to want to omit a claim from the bankruptcy paperwork for one reason or another. You can’t do it. You’re required to list all claims both the claims you think you owe, and those others think you owe. It’s in your best interest to do so. If you fail to list a claim, the claim might not be erased (discharged) in your case—even if it qualifies as a dischargeable debt.
Paying Claims in Bankruptcy
If money is available to pay creditors, here’s what will happen next:
• The bankruptcy trustee appointed to the case will send out a notice alerting creditors that the case is an “asset case.”
• A creditor will file a proof of claim form by a particular date to share in the available proceeds.
• The trustee will review the claims and pay them according to the priority payment system in bankruptcy law.
Keep in mind, however, that each situation is unique. If you aren’t clear what will happen to claims in your bankruptcy case, you’ll want to meet with a knowledgeable bankruptcy lawyer.
What are Contingent, Unliquidated and Disputed Debts?
In bankruptcy, not all debts are straightforward. Sometimes it may be difficult to determine how much you owe and when you owe it. Typically, these kinds of imprecise debts are either contingent, unliquidated or disputed:
• Contingent debt. These are debts that you may owe in the future, but they depend on a certain event that has not yet happened. The most common example of a contingent debt is if you cosign someone else’s loan. You only owe money if the other person defaults. Since that may never happen, you may never actually owe the debt. Therefore, if the primary borrower is not in default when you file bankruptcy, then the loan is your contingent debt.
• Unliquidated debt. Like contingent debts, an unliquidated debt is an obligation you may owe now or in the future, but the monetary amount is currently incalculable. For example, you may be in the midst of a personal injury lawsuit. Your attorney in that matter may collect contingency fees, which means the lawyer gets a percentage of the settlement or verdict at the end of the case. You will owe your attorney’s fees, but you cannot know how much you owe until your case concludes. Therefore, personal injury attorney fees are typically unliquidated debt, if the case is still in progress.
• Disputed debt. Sometimes, a creditor may claim you owe a certain amount, but you disagree with the sum or with the claim altogether. This is a disputed debt, which can involve virtually any kind of creditor. However, you must have a legal reason why you disagree with the amount due. For example, if a credit card company charged you 30 percent interest for missed payments, but your original contract stated that this penalty would only be 15 percent, then this may be a disputed debt.
Why Should I List Debts I Disagree With or Do Not Owe Right Now?
Listing a contingent, unliquidated or disputed debt does not mean you are agreeing to or will have to pay those debts. Including a list of all claims simply means that everything you owe or might owe is considered for discharge. In many cases, this means you can eliminate your liability for these debts.
For example, while you do not technically owe a contingent debt at the time of your bankruptcy filing, you may be able to discharge your future obligation. Similarly, some unliquidated debts are also dischargeable in bankruptcy, even though the exact dollar amounts are unknown.
If you have a disputed debt, then you should take care to list the amount the creditor claims you owe, not what you believe you owe. The exact amount you owe may or may not matter since a discharge eliminates the liability regardless of amount. This is true for both a Chapter 7 liquidation and a Chapter 13 repayment plan. However, if you do not list a certain creditor or debt when you file for bankruptcy, then you may not receive a discharge for that debt. This means the creditor may be able to bring collection actions against you even after you receive a bankruptcy discharge. The fact is that you must list all debts, even ones that are not subject to discharge.
Questions About Confusing Debt? Contact Ascent Law Firm Bankruptcy Attorneys
The rules for filing bankruptcy can be confusing, especially if you owe or may owe many different types of debt. If you are considering bankruptcy, then contact Ascent Law Firm bankruptcy attorneys for legal advice before you file. In a free initial consultation, we can gather information about your debts and advise you whether bankruptcy is right for you. If so, then we can assist in filing all the necessary paperwork, including generating a comprehensive list of all creditors. Whether you owe contingent, unliquidated and/or disputed debt, we will work to ensure the bankruptcy process goes smoothly.
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It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
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